The ATO's View on the Meaning of "In-House Assets"- New Draft Determination

The Australian Tax Office (ATO) has released a Draft Self-Managed Superannuation Fund Determination which deals with the in-house asset rules. The Draft Determination confirms the ATO's view on the effect of the provisions that allow SMSFs to invest in 'traditional' in-house assets in some circumstances. Paul Ellis and Laura Racky

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Background

The Superannuation Industry (Supervision) Act 1993 (SISA)¹ restricts superannuation funds' ability to invest in in-house assets. The Act defines the meaning of 'in-house asset'² and the Superannuation Industry (Supervision) Regulations 1994 (Regulations) specify the circumstances in which an asset will be deemed NOT to be an in-house asset³. Yet another regulation⁴ provides exceptions to this exception if any one of a number of events occur!

The ATO's new Draft Determination⁵ has clarified its thinking on regulation 13.22D concerning the exceptions to when an asset is deemed not an in-house asset. It generally has the effect of deeming assets to be in-house assets. The Draft Determination provides that an investment made by a self-managed superannuation fund (SMSF) in a related company or unit trust can be deemed not to be an in-house asset even though an event in regulation 13.22D has occurred.

When will an asset be deemed NOT to be an in-house asset?

Regulations 13.22B and 13.22C say that in some circumstances, an investment in a company or a unit trust that would otherwise be an in-house asset under section 71(1)(j)(ii) of the SISA, will not be deemed an in-house asset. Those circumstances are set out in Annexure A to this article.

When will an asset be deemed to be an in-house asset?

Regulation 13.22D(1) prescribes a range of events (the 13.22D events) that will deem an asset to be an in-house asset, even if regulations 13.22B or 13.22C apply. So if a 13.22D event occurs, regulations 13.22B or 13.22C will cease to operate, and the investment will be deemed to be an in-house asset.

The 13.22D events are many and varied. They are set out in Annexure B to this article.

The Draft Determination

The Draft Determination provides that an investment in a related company or unit trust can be deemed not to be an in-house asset even though a 13.22D event happens that would otherwise deem those investments to be in-house assets of the SMSF. But whether or not an investment will be deemed not to be an in-house asset depends on the nature of the 13.22D event.

Assets Deemed not to be In-House Assets even though a 13.22D Event has occurred

In the Draft Determination, the ATO breaks the 13.22D events into two sections:

1. Events relating to the SMSF
   
   Under regulation 13.22D(1)(a), if the number of members of an SMSF increases to 5 or more, 13.22B and 13.22C will cease to operate, and the assets to which regulations 13.22B and 13.22C previously applied will be deemed to be in-house assets.
   
   However, the Draft Determination says that if the 13.22D event occurred before an investment was made, but at the time the investment was made, the SMSF goes back to having fewer than 5 members, and all the requirements of subregulations 13.22B or 13.22C are satisfied, then the asset can still be deemed not to be an in-house asset.
   
   The Draft Determination includes the following example:
   
   • An SMSF invests in related trusts (Trust A and Trust B) at a time where the number of members in the SMSF is 4. The SMSF's investments in Trust A and Trust B satisfy all the requirements of regulation 13.22B and the assets are deemed not to be in-house assets of the SMSF.
   • However, after the investments are made in Trust A and Trust B, the number of members in the SMSF increases to 5. This is a 13.22D event. Accordingly, the investments that were made in Trust A and Trust B are deemed in-house assets of the SMSF. These investments in Trust A and Trust B then remain in-house assets regardless of future events.
   • Then, at a later date, the number of members in the SMSF decreases to 4. The Draft Determination confirms that any future investments that the SMSF makes (that is, in companies or trusts other than Trust A and Trust B) that satisfy all the requirements of regulation 13.22B or 13.22C will be deemed not to be in-house assets, even though previously a 13.22D event had occurred relating to the SMSF.
   
   
2. Events relating to a company or trust in which the SMSF has an interest
   
   13.22D events (b) to (n) are events which happen in respect of a particular company or unit trust in which the SMSF has an investment (rather than an event that occurs in relation to the SMSF itself). However, the Draft Determination confirms that the exception provided by regulations 13.22B or 13.22C may continue to apply to investments held by the SMSF in other related companies or unit trusts in respect of which the event did not happen, provided that the requirements of the subregulations continue to be met.

Comments on the Draft Determination

The Draft Determination appears only to be further clarifying the words in regulation 13.22D(1), extracted here:

If regulation 13.22B or 13.22C applies to an asset, that regulation ceases to apply to the asset if any of the following events happen:

The regulation then lists the 13.22D events.

The Draft Determination illustrates that the ATO's clear view is that:

• a 13.22D event relating to the SMSF will affect all assets previously deemed not to be in-house assets by operation of 13.22B or 13.22C; and
• a 13.22D event relating to a company or trust in which the SMSF has an interest will only affect the in-house asset status of the investments the SMSF has in that particular company or trust.

What does the Draft Determination mean for trustees of SMSFs?

The ATO proposes that, once finalised, the determination set out in the Draft Determination will apply to years of income both before and after the date it is issued.

Your Comments

The ATO has invited the public to comment on the Draft Determination. The due date for comments is 16 November 2007.

More information

For more information about these changes or about superannuation generally, contact Maddocks on 03 9288 0555 and ask for a member of the Maddocks Superannuation Team.

ANNEXURE A

Subregulations 13.22B and 13.22C — Assets deemed not to be in-house assets

Subregulations 13.22B and 13.22C apply to an asset of an SMSF that:

• is an investment in a company or unit trust; and
• was acquired by the fund before, on or after the commencement of the Division (28 June 2000); and
• is not affected by regulation 13.22D(3).

For the purposes of section 71(1)(j)(ii) of the SISA, subregulations 13.22B and 13.22C will deem an asset not to be an in-house asset of the SMSF if, when the asset is acquired (or, in relation to regulation 13.22B, when the Division commenced, being 28 June 2000):

• the SMSF has fewer than 5 members; and
• the company, or a trustee of the unit trust, is not a party to a lease with a related party of the SMSF, unless the lease relates to business real property; and
• the company, or a trustee of the unit trust, is not a party to a lease arrangement with a related party of the SMSF, unless the lease arrangement:
  • is legally binding; and
  • relates to business real property; and
• the company, or a trustee of the unit trust, is not a party to a lease, or lease arrangement, with another party in relation to an asset that is the subject of another lease or lease arrangement between any party and a related party of the SMSF (unless the asset is business real property); and
• the company, or a trustee of the unit trust, does not have outstanding borrowings; and
• the assets of the company or unit trust do not include:
  • an interest in another entity; or
  • a loan to another entity, unless the loan is a deposit with an authorised deposit-taking institution within the meaning of the Banking Act 1959 ; or
  • an asset over, or in relation to, which there is a charge; or
  • an asset that was acquired from a related party of the SMSF after 11 August 1999, unless the asset was business real property acquired at market value.

Further, an asset will be deemed not to be an in-house asset (regulation 13.22C) if that asset had been at any time (unless it was business real property acquired by the company, or a trustee of the unit trust, at market value) an asset of a related party of the SMSF since the later of:

• the end of 11 August 1999; and
• the day 3 years before the day on which the fund first acquired an interest in the company or unit trust;

or if such an asset had been at any time in the period from the end of August 1999 to the commencement of the Division (28 June 2000), an asset of a related party of the SMSF.

ANNEXURE B

Regulation 13.22D(1) Events

If any of the following events happen (the 13.22D events), subregulations 13.22B or regulation 13.22C will not operate and an asset will be deemed to be an in-house asset:

Events relating to the SMSF

• if the number of members of the SMSF increases to 5 or more;

Events relating to a company or trust in which the SMSF has an interest

• if either of the following becomes an asset of the company or unit trust:
  • an interest in another entity;
  • a loan to another entity, unless the loan is a deposit with an authorised deposit-taking institution within the meaning of the Banking Act 1959 ;
• if the company, or a trustee of the unit trust:
  • borrows money; or
  • gives, or allows to be given, a charge over, or in relation to, an asset of the company or unit trust;
• if the company, or a trustee of the unit trust, conducts a business;
• if the company, or a trustee of the unit trust, becomes a party to a lease with a related party of the SMSF, unless the lease relates to business real property;
• if the company, or a trustee of the unit trust, becomes a party to a lease arrangement with a related party of the SMSF, unless the lease arrangement:
  • is legally binding; and
  • relates to business real property;
• if the company, or a trustee of the unit trust, is a party to a lease, or legally binding lease arrangement, with a related party of the SMSF in relation to business real property, and the property ceases to be business real property;
• if the company, or a trustee of the unit trust, is a party to a lease arrangement with a related party of the SMSF in relation to business real property, and the lease arrangement ceases to be legally binding;
• if the company, or a trustee of the unit trust, becomes a party to a lease, or lease arrangement, with another party in relation to an asset (unless it is business real property) that is the subject of another lease or lease arrangement between any party and a related party of the SMSF;
• if a related party of the SMSF becomes a party to a lease, or lease arrangement, with another party in relation to an asset (other than business real property) that is the subject of another lease or lease arrangement between any party and:
  • the company; or
  • a trustee of the unit trust;
• if the company, or a trustee of the unit trust, is a party to a lease, or lease arrangement with another party in relation to business real property (that is the subject of another lease or lease arrangement between any party and a related party of the SMSF), and the property ceases to be business real property;
• if the company, or a trustee of the unit trust, conducts a transaction otherwise than on an arm's length basis;
• if the company, or a trustee of the unit trust, acquires an asset of a related party of the SMSF, unless the asset is business real property acquired at market value;
• if the company, or a trustee of the unit trust, acquires from any party an asset (unless it is business real property acquired by the company, or trustee of the unit trust, at market value) that had been an asset of a related party of the SMSF at any time since the later of:
  • the end of 11 August 1999; and
  • the day 3 years before the day on which the asset was acquired by the company or the trustee of the unit trust.

¹ Sections 69 to 85 SISA
² Section 71(1)(j)(ii) SISA
³ Regulations 13.22B and 13.22C
⁴ Regulation 13.22D
⁵ Draft Determination SMSFD 2007/D2